The Trump administration has proposed new regulations that would revoke the tax-exempt status of schools that provide advantages to students based on race, including in admissions, scholarships, and financial aid. The Treasury Department estimates that more than 18,000 educational institutions across the United States could be affected by this proposed rule.
The regulation would not apply to religious institutions or to the use of "race-neutral criteria" such as family income, individual hardship, military family status, or academic achievement. However, any school found to be conferring benefits on the "basis of race, color, or national or ethnic origin" would lose its tax-exempt status.
Treasury Secretary Scott Bessent stated that schools should cease race-based discrimination. "Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature," Bessent said in a statement. "Today’s Treasury and IRS proposed regulations establish a clear standard, and the institutions that continue to use discriminatory practices will no longer receive the benefits of federal tax-exempt status.”
While the direct tax liability for these schools might be minimal, the change could significantly impact their fundraising capabilities, as donations would no longer be tax-deductible for donors.
This initiative is part of President Trump's broader efforts to reshape the nation's education system, with a focus on returning authority to the states. His administration has previously scrutinized colleges and universities for race-based practices, including an attempt to strip Harvard University of its tax-exempt status over allegations of antisemitism and campus hate. The new rule, however, expands the use of the IRS to enforce the administration's vision across a wider range of educational institutions, including private primary and secondary schools, colleges, universities, professional schools, and trade schools, regardless of whether they receive federal funding.
An example cited is the Kamehameha Schools in Hawaii, a private K-12 institution facing a lawsuit for prioritizing Native Hawaiian students in admissions. Although the school has argued that federal civil rights laws do not apply because it does not accept federal funds, the proposed rule on tax-exempt status would extend to such cases.
Previous changes under the Trump administration in the education sector include directives against "critical race theory and transgender insanity" in schools, the reinstatement of the presidential fitness test, and the return of whole milk as a cafeteria option. Trump has frequently expressed concerns about the state of education, noting a decline in student proficiency in reading and math.
The proposed rule is slated to take effect for taxable years beginning on or after May 31, 2027, allowing affected institutions time to revise their policies. The regulation is subject to a public comment period, which could lead to modifications before finalization. Following implementation, the IRS is expected to conduct audits to ensure compliance.
The administration's legal justification for the rule references the Supreme Court's 2023 decision in the Students for Fair Admissions case, which prohibited the use of race in college admissions as a violation of the Equal Protection Clause of the 14th Amendment. This ruling has already had a ripple effect, leading to a decrease in race-, ethnicity-, or gender-targeted scholarships. Data from the National Scholarship Providers Association shows a drop from 15% in 2023-2024 to 11% by 2026 for such scholarships.